Impact of Public Debt, Lending Interest Rate, Public Spending and Money Supply on Private Consumption in South Asian Countries: An Econometric Analysis

Abstract

The public debt of South Asian countries has witnessed a continuous increase from the last three decades which has badly affected the household private consumption expenditures. High public debt can lead to steep losses for banks, both domestic and international, undermines the stability of financial systems in both the crisis-hit country and others. This can hit economic growth as well as private consumption. The purpose of this study is to examine the impact of public debt on private consumption in South Asian countries i.e. Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Besides public debt, the impact of some other important macroeconomic, fiscal, and monetary variables like lending interest rate, public spending and money supply have also been examined. For this purpose, 31 years of panel data from 1990 to 2020 of South Asian countries have been taken. The study has used a variety of econometric techniques like Robust Least Square Regression, Panel Cointegration, Error Correction Model (ECM), Wald test, and Panel Fully Modified Least Squares (FMOLS) approach to examine the short-run and long-run relationship among the variables. The results of Robust Least Square Regression indicate that public debt discourages private consumption. The lending interest rate also badly affected private consumption. The other variables like public spending and money supply have a favorable impact on private consumption. The results of the Kao Residual Panel Cointegration Test and the Johansen Fisher Panel Cointegration Test indicate that there exists a long run relationship among the variables. The results of the ECM and Wald Test reveal that a long run and short-run causality is running from independent variables to the dependent variable respectively. The study recommends that by using monetary and fiscal policies effectively the private consumption and economic growth can be stimulated in the economy. Keywords: South Asia, Public Debt, Private Consumption, Lending Interest Rate Public Spending, Money Supply, Robust Least Square Regression, ECM, FMOLS, Wald Test.